SMEs; Growth; impediments; Informal Economy; Ghana

1. Growth of and Impediments to Small
and Medium Enterprises (SMEs) in
Ghana: The Predominance of the
Informal Economy
Charles D. Williams
Swiss Management Center University
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2. INTRODUCTION
Background
• Private sector progress has been recognized as critical for job
creation, growth and development (Kurokawa, Tombo & te Velde,
2008)
• Its development has proved to contribute to poverty alleviation in
sub-Saharan Africa, including Ghana (Okpukpara, 2009)
• Its success therefore is estimated to be associated with socio-
economic growth and improved livelihoods of the people
• In Ghana the private sector has been dubbed the “the engine of
growth” by both past and present administration (Aryeetey &
Ahene, 2005)
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3. SME Characteristics in Ghana
• Within the Ghanaian business landscape, indigenous micro,
small and medium enterprises (MSMEs) dominate the
private sector.
• Approximately 90 percent of companies and registered
businesses are micro, small and medium enterprises (Abor
& Quartey, 2010; Ohene-Konadu, 2008).
• These SMEs operate in two modes - the formal and the
informal sector.
• Hart (1973), defines formal economy as legally sanctioned,
state regulated, and marked by regular work. On the other
hand, the informal economy is seen as comprising business
activities that are unregistered and unregulated, but not
otherwise illegal (Hart, 2006).
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4. Purpose of the Study
• To explore why Ghanaian entrepreneurs commence
trade as formal entities but later decide to fully or
partially engage in informal economic practices.
• To identify why informal businesses chose to begin
in that manner, rather than become registered
entities.
• To examine obstacles informal business operators
face in their attempts to move to the formal sector.
• To examine and compare with the existing SME
development framework with the aim of making
recommendations for government’s SME policy
formulation.
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5. Research Questions and Approach
• What factors drive SMEs in Ghana to operate within
the informal economy rather than the formal
economy?
Did entrepreneurs who entered the informal
economy seriously consider entering the formal
economy but found the barriers too steep?
What factors do entrepreneurs operating in the
informal economy identify that could make it
attractive for them to move their firms into the
formal economy?
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6. Methodology
Research design and Sampling strategy
• Qualitative Phenomenological Research.
• Semi-structured interviews: offers flexibility to participants by allowing them
to express themselves and respond to questions in any way they want (Kvale &
Brinkmann, 2009).
• Accra and Tema were the industrial locations covered by the study.
• Participants were selected using a purposive sampling strategy. Purposive
sampling was ideal for this study owing to its underlying logic and power of in-
depth understanding (Patton, 2002).
• 15 entrepreneurs were sampled according to industry and status of informality.
• In all, 15 semi-structured interviews were conducted with entrepreneurs
following an interview guide developed for the study.
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7. Ethical Considerations
• Informed consent, confidentiality and anonymity were
important ethical considerations throughout the study.
The purpose of the study was clearly explained to the participants
Informed consent was obtained from the participants prior to the
commencement of the interviews after their rights as participants
had been clearly explained.
Participants were made to understand that participation in the
study was voluntary and that they could stop the interview at any
time, or skip questions they felt uncomfortable.
Participants’ identities were protected not only in the interviews
but also in the analysis. The participants were told not to mention
their names while the interviews were in progress; other
identifying details were further anonymized.
There were no risks associated with participating in the study.
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8. Sample Characteristics (N=15)
Participant Characteristic Number (n) Mean Standard Deviation Range
Gender
Male 8
Female 7
Education
Basic School 1
Junior High School 1
Senior High School 4
Vocational 4
Polytechnic 3
University 2
Age of participant (years) 39.20 8.21 28 – 55
Working hours 10.53 3.91 6 – 16
Business age (years) 10.46 7.23 1 – 24
Business Sector
Trade 5
Artisans 5
Manufacturing 1
Agriculture 1
Contractor (Building) 2
Transport 1
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9. Characteristics of Research Participants and Their Enterprise (N=15)
Note: P = Participant; M/S = Marital status; I/M = Income/Month; FS = Family Size; W/H= Working Hours; AB = Age of
Business; NE = Number of Employees; PE = Paid Employment
P Sex Age M/S Sector I/M FS WH Education AB NE PE
1 F 30 Single Petty Trading < 500.00 5 10 H/Sch 8 0 No
2 F 44 Single Petty Trading < 500.00 5 12 H/Sch 20 0 No
3 F 35 Married Artisan < 500.00 2 10 Vocation 5 0 No
4 M 36 Married Artisan < 3000.00 7 16 Vocation 12 3 No
5 M 38 Married PettyTrading < 3000.00 4 16 University 5 0 No
6 F 28 Married Artisan < 1000.00 7 7 H/Sch 3 2 No
7 M 55 Married Manufacturing < 5000.00 4 16 H/Sch 24 4 No
8 M 39 Married Artisan < 500.00 3 10 Vocation 19 0 No
9 M 45 Married Farming < 500.00 6 4 Basic 2 0 No
10 F 28 Single Artisan < 1,000.00 5 16 Polytech’c 7yrs 7mths 0 No
11 M 52 Married
General
Contractor 1,000.00 5 9 Polytech’c 20 15 No
12 F 35 Single Petty Trading 500.00 1 8 Jnr H/Sch 12 0 Yes
13 M 37 Married Transport < 1,000.00 4 10 University 1yr 3mths 0 No
14 M 48 Married
General
Contractor 1,000.00 5 8 Polytech’c 8 5 No
15 F 40 Separated Petty Trading < 1,000.00 2 6 Vocation 10 2 Yes
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10. RESULTS (N=15)
Informal Entrepreneur Motivations
Number Theme Number of participants
1 Financial autonomy and security 10
2 Start-up capital constraint 8
3 Business and lifestyle autonomy 5
4 Necessity-driven motive 4
5 Putting skills into practice 4
6 Opportunity-driven motive 3
7 Multiple income motive 3
8 Ease of entry 3
9 Entrepreneurial spirit 2
10 Convenience of income generation 2
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11. Barriers to formalization
Number Theme Number of participants
1 Lack of access to finance and high cost of
borrowing
14
2 Lack of education about registration
procedures
13
3 Cumbersome and expensive registration
process
12
3a Cost of business registration 8
3b Bureaucratic registration regime 4
4 Lack of business registration knowledge 10
5 Taxation 6
6 Fatigue of sole proprietorship 6
7 Lack of managerial skills 4
8 Competition from imports 2
9 Lack of social amenities and infrastructure 2
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12. Growth to formalization
Number Theme Number of
participants
1 Business continuity and benefits
of registration as incentives to
formalization
10
2 Private organizational support as
incentive to formalization
1
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13. Recommendations
• Official recognition of the existence of the informal sector
as a distinct economic contributory sector and the need to
formulate sector-specific policies for its growth and
development.
• A workable agreement between all stakeholders based on
capacity building, productivity gains, an enabling
business environment, empowerment and entitlement to
social and economic rights (ILO, 2014).
• The desire to formalize was conditioned upon the provision
of certain incentives and motivation by government:
 Access to finance
 Training & seminars
 Friendlier tax policies
 Initiatives that guarantee the continuity of their business.
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14. Recommendations cont’d…
• Thus this findings recommend a specific national SME policy
framework that would cover:
 Job creation.
 Flexible business registration procedures tailored to the peculiar needs of the
sector operators.
 Extension of the social protection of the formal sector to the informal sector
such as State pension schemes, police and security agencies protection, and an
appropriate legal framework to protect the sector operators against risks and
insecurity.
• A One-Stop-Shop: An integrated Approach –Based on a Canadian
Model of Business Service Centers (CBCS). This was successfully
used by the Egyptian government in 1995 (Smith, 1995). Involves
removing regulatory burdens on SMEs. It requires establishing of
business centers at regional level aimed at providing services and
advice to existing and would-be informal entrepreneurs.
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15. Limitations
• The sample was limited to informal
sector operators who resided and
practiced only in the capital city of
Ghana (Accra and Tema Metropolis).
• Typical of qualitative research, the
sample in the study was relatively small.
Thus, generalizability of the study to the
general population at large is difficult and
as such these findings should be
interpreted with caution.
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16. Further research
• Based on the findings of this study, the informal sector could be a
major source of revenue for the government if concrete efforts are
made to bring the sector into the mainstream formal economy.
• It is the recommendation of this study that further in-depth
research work be carried out on the Ghanaian informal sector to
determine:
 the extent to which the present state of the economy, vis à vis
the external economic factors and entrepreneurial behavior
patterns, have influenced the growth or otherwise of the
informal sector across the entire country; and
 what feasible and concrete initiatives the government can
develop to entice the informal sector to migrate to the
formality platform for the purpose of enhancing its tax
revenue base.
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17. Acknowledgements
• Professor Dr. Albert Widman
• Professor Dr. Ted Sun
• Dr. Thomas Akoensi
• Dr. Francis Annor
• Dr. Elizabeth (Liz) van Aswegen
• Marilyn Baker–Research Director (SMC Uni)
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18. Thank You For Listening
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